“Trade Wars are Good, and Easy to Win”

Whether you see it as all-out trade war or simply bilateral skirmishing, the normally relatively staid world of global trade is heating up, with the US announcement yesterday of intentions to impose tariffs on a further $200 billion of Chinese imports, adding to the $50 billion-worth already in train. The impacts are primarily going to be felt in the US and China, but there is no question that we will see the fallout in New Zealand, and in the global trading system more broadly.

The US provoked widespread consternation earlier this year by imposing tariffs on steel and aluminium imports from allies Europe, Canada, Mexico and others (including New Zealand), ostensibly on “national security” grounds. The latest round of tariffs, scheduled to come into effect after August, is driven by US concerns over alleged Chinese appropriation of US technological know-how and policies intended to develop a strong Chinese high-tech sector; the US is at the same time taking steps to tighten controls on Chinese investment. President Trump has also threatened new tariffs on European autos.

Most trading partners are taking care to frame their responses in terms of consistency with World Trade Organisation (WTO) rules.   Eight countries have launched WTO legal challenges against the US steel tariffs.   Many have also imposed or threatened retaliatory tariffs, accounting for roughly 13% of US imports. In the case of steel, the response by trading partners has been justified on grounds that the US has in fact imposed “safeguard” tariffs, for which retaliation is permitted under WTO rules.

The fallout from these actions will go deep and wide. US consumers are likely to face more expensive consumer goods from China. US manufacturers are already facing increased costs due to more expensive imported inputs. US farmers will suffer as precision-targeted Chinese retaliatory tariffs – on soybeans (for which China is the US’s biggest market), pork, bourbon and other important exports – start to take effect. In the short term, it is likely that opportunities in the Chinese market will be taken up by competitors, and not quickly regained by US exporters. There will be disruption in global markets and collateral damage to other trading partners; in this modern ‘global value chain’ world, many of the affected “Chinese” imports include significant inputs from third countries, and product displaced from whichever market, be it the US or China, will need to find a home elsewhere.

New Zealand has so far only felt the impacts in terms of tariffs on steel exports to the US. Other short term effects are likely to be modest (although the latest action has affected exchange rates and stock markets). However, looking ahead, we can expect more volatility in export markets and disruption of familiar trade patterns. Of more serious concern, however, are the implications for the integrity of the rules-based global trading system.   There is no end in sight to the trade war: there are no bilateral US-China talks scheduled or underway, and there would not seem to be any specific action that China could take that would satisfy US complaints. It seems likely that we will see a ramping up of non-tariff barriers around the world, in addition to tariff mechanisms, in response to the tit-for-tat action and trade disruption – less visible but no less significant.

Leaked reports last week suggested that President Trump had asked his officials to look at pulling the US out of the WTO. Withdrawal from the WTO seems unlikely in a practical sense (it would require the approval from the US Congress, which has just overwhelmingly passed a non-binding motion to limit the President’s ability to impose national security tariffs) but the symbolism of raising the issue should not be downplayed. The US is already responsible for a slow strangulation of the WTO dispute settlement process – a mechanism which means small countries like New Zealand do not need to fear or try to indulge in ‘gunboat diplomacy’. President Trump tweeted in March that “trade wars are good and easy to win”. Given the ambiguity of the US position, it is hard to know what victory would look like.

This post was prepared by Stephanie Honey, Associate Director of the NZ International Business Forum.